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Investing in periods of market downturn: 3 strategies for behavior on the stock exchange


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situation in which financial and stock markets have been dropping for quite some time is called the “bear market”. The Investopedia portal has examined several behavioral strategies for stock investors that they can use in a similar situation. We have prepared an adapted version of this material.

Sales strategy


In times of downfall, this strategy may be the most reliable asset conservation tool. It involves the quick sale of the entire portfolio and waiting "cash" or redirecting finances to purchase more reliable financial instruments - for example, federal loan bonds using an individual investment account .

This allows you to reduce risks and minimize possible losses. It is important to understand that it is impossible to say for sure that the sale of assets occurs at the right time. There is always a chance that the investor is selling its assets near the bottom of the market drop.

For those who want to try to make money on a falling market, there are short positions - when an investor hopes to lower the price of, for example, shares, and takes them in debt, then to “buy back” them at a lower price and return the shares with a profit.

Defensive strategy


Those investors who do not want to immediately close open positions usually use a defensive strategy. It implies initial investments in larger companies with a stable position, a serious history and good income. Typically, the stocks of such giants suffer less during periods of market downturn.

The list of such “protective” stocks often includes securities of companies that serve the daily needs of people — for example, operators of supermarket chains (people need to eat even during periods of the most protracted crisis). As a rule, such companies have a good financial pillow, and their goods and services remain in demand. Accordingly, the probability of successfully overcoming difficult periods in the economy is higher for them.

One of the defensive strategies that work is the purchase of defensive put options. These are contracts that give the holder the right, but not the obligation, to sell any stock at a predetermined price on a certain date in the future. For example, if an investor has 100 SPY S&P 500 ETF shares for $ 250 each, and he bought a put option with a strike price of $ 210 for six months, then on the expiration date he will have the right to sell his assets at a price of $ 210 - and the seller of the option will obligated to pay this price. The holder of the option can activate it in case of falling asset prices, limiting their losses.

Search for profitable deals


A bear market may be a good time to buy stocks at a lower price than usual. To solve this problem, they use the so-called “Dollar Cost Averaging” strategy, that is, purchases at an average cost. There is a theory that in the long run, stocks are rising.

Proponents of this approach believe that they should invest the same amount in similar groups of assets at regular intervals (once a week / month, etc.). As a result, this reduces the likelihood of a serious drawdown in the portfolio.

Suppose an investor who adheres to this approach will invest an amount equivalent to $ 1000 each month. He does not pay attention to news headlines and the current situation, regardless of these factors, he buys shares of strong companies that pay dividends. Dividend payments in such a strategy help reduce the effect of a possible temporary drop in stock prices.

It is also always useful to apply the principles of portfolio diversification and invest in assets that are not directly related to each other. For example, to buy not only stocks, but also bonds - the cost of such instruments can move in the opposite direction.

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